Theirs to recover: Why Ontario’s fiscal ‘time bomb’ is still not defused

The Chestnut Conference Centre, once a hotel but now part of a non-descript student residence in downtown Toronto, is only a short walk from Queen’s Park but worlds apart from the stately brass and wood fittings of the seat of the provincial government.

As such, it was a suitable neutral ground for the first skirmishes of The Great Ontario Labour War of 2012.

It was at the Chestnut that representatives of the McGuinty government met with officials of the province’s teachers’ unions to begin what all sides knew were going to be brutal contract negotiations.

The government’s objective was simple. They were to tell the unions that there was no money — none — for salary or benefit increases. The province’s fiscal picture was bleak. These were the financial parameters that had to be met.

On the afternoon of Feb. 22, the leadership of the Elementary Teachers Federation of Ontario, along with more than a dozen regional chairs, took their seats across from a small group representing the government side. A scripted statement outlining the province’s dire position was delivered. There was no new money.

Related

The union, though, had its own agenda. Four years earlier, it had walked away from contract talks, despite a warning from the education minster at the time, Kathleen Wynne, that doing so could result in a worse offer later. That’s exactly what had happened: the elementary teachers ended up with a contract that increased salaries by about 2% less than those of other teachers.

At the Chestnut, the union leadership responded to the opening foray by saying the 2% discrepancy had to be part of their discussions. The government side was bewildered. Did no one listen to the statement? The government wasn’t about to commit to additional spending. It didn’t even want to hold the line. These were concessionary discussions, solely meant to determine how much the unions would give back. Dalton McGuinty and his Finance Minister, Dwight Duncan, had been laying the groundwork for these talks for weeks, vowing that austerity plans were the only way to balance the budget. The union negotiators said they would be back in touch, but if the 2% top-up wasn’t a possibility they didn’t want to keep talking. They walked out and would not return. Those discussions lasted about one hour.

The consequences of what would become a year-long stalemate were far-reaching. Teachers stopped performing extra-curricular duties. Mr. McGuinty and Mr. Duncan both left politics. And just this week, the governing Liberals announced that the 2012-13 budget came in with a deficit of $9.2-billion, $600-million lower than forecast. While the Wynne government touted this achievement as the result of its ongoing commitment to fiscal discipline and responsible management, the explanation is somewhat simpler: The McGuinty government took the wood to the unions in 2012, and this was the pay off. One had to go beyond the fine print of the government’s Tuesday announcement to the updated Public Accounts to find that among its lower-than-expected spending accomplishments was this nugget: “one-time savings of $1.3-billion from reducing liabilities carried by school boards for sick-day banking and retirement gratuities”. These were the benefits that the teachers refused to surrender; the province only managed to eliminate them by imposing legislation the unions considered unconstitutional.

But, even as it claims credit for spending accomplishments engineered by the now-departed premier, the Kathleen Wynne government — despite a projected deficit for the current year that, at almost $12-billion, is about 30% higher than last year — shows no signs of continuing the fight with unions. In fact, the opposite is true and what happened next with the elementary teachers is instructive.

I think we simply cannot count on the economy to basically save the day

This past June, just before the provincial legislature rose for the summer, the government and the elementary teachers’ union announced that they had reached a deal on a new contract. It was the culmination of a period of détente that had begun with the January selection of Ms. Wynne as Liberal leader to replace Mr. McGuinty. One of her first moves as Premier had been to renew contract discussions with the two teachers’ unions — the elementary teachers and their secondary-school counterpart — that had seen contracts imposed under the provisions of the much-reviled Bill 115. Those discussions were now completed. Among the terms of the new contract for elementary teachers: a 2% salary top up, beginning upon the expiration of the current contract which runs through the 2014 school year.

Ontario’s austerity era was over. It had lasted about a year and a half.

As the legislature returned from its summer break this week, Finance Minister Charles Sousa used the revised deficit projections for the past year to proclaim that the government was on track to meet its target of eliminating the deficit by 2017-18. The reality is far more challenging. Post-recession, the province has amassed record levels of debt, but has skirted that problem thanks to historically low interest rates that are expected to climb. Economic growth forecasts, meanwhile, have softened slightly. The manufacturing sector continues to be weighed down by a strong dollar. And most importantly, there is the fact that when the government embarked on its austerity plan in 2012, it never made sense for it to only last two years.

“I think we simply cannot count on the economy to basically save the day,” says Doug Porter, BMO’s chief economist. “And in an incredibly competitive international environment, I don’t really believe that we can count on big revenue increases to turn the ship around either. I think it will require very tough spending restraint for years, and any sign that the guard is being let down on that front is a potentially serious setback to the interim fiscal outlook.”

That revised contract with elementary teachers appears to be good indication the government is letting its guard down.

—

Not long after the Liberals had confounded pundits and pollsters by winning the 2011 election, they were told they needed to develop a fiscal plan that was considerably less rosy than the one they had just sold to voters. Provincial debt was still piling up, meaning interest costs were climbing with it. With almost two-thirds of its budget already committed to the health and education ministries, money was extremely tight. Global economic concerns had also clouded Ontario’s outlook. A confidential report prepared by Finance Ministry officials for Cabinet expressed concerns about a possible credit downgrade: “No amount of talk about ratios or the Canada brand can disguise what we are hiding in plain sight: seventh largest of all non-sovereign borrowers in the world and greater reliance on borrowed capital than any other state-level government that we know of.”

These types of worries are not just the stuff of secret Cabinet documents. When economist Don Drummond was brought in to chair a panel that assessed the province’s public service, he produced a report that said Ontario “faces more severe economic and fiscal challenges than most Ontarians realize.” Absent any changes, he said, the deficit that was scheduled to be eliminated by 2017-18 would instead hit $30-billion by that time. And last winter, as provincial Liberals were in the process of choosing a new premier, then-finance minister Dwight Duncan took the unusual step of giving speeches — twice — that warned Mr. McGuinty’s would-be successor of the consequences of stepping off the current fiscal track. Mr. Duncan said that Liberal austerity measures up to that point had tackled the “low-hanging fruit” and that record-low interest rates were a “ticking time bomb” given the province’s record-high debt levels. Those interest rates have since started to inch upward. Economists and debt-rating agencies are unanimous in expecting them to climb further.

“The trend will be up in the next few years,” says Mr. Porter of BMO. “So the free pass that provinces have been granted in the last year or two on the debt service charge may be coming to an end.”

And as interest rates rise, growth projections have been lowered. In the pre-election budget of 2011, the government forecasted revenues that would grow to $142-billion by 2017-18. Last spring’s 2013 budget had reduced Ontario’s projected revenue in 2017-18 to $134-billion. All other things being equal, that’s an $8-billion hole the province has to fill. And even Mr. Sousa’s good-news announcement this week included the fact that revenues were almost $1-billion lower in 2012-13 than what was forecast just last spring.

The weaker-than-expected economy means Ontario “is in tougher shape than anybody else trying to get back to balanced budget,” says Glen Hodgson, senior vice president and the chief economist of the Conference Board of Canada. “They’re in a deeper hole.” The budgets from the early part of this decade were predicting robust growth of 4.5% in the province by 2017-18. The Conference Board, among other forecasters, now expects tepid growth of “2% or less” by that time, Mr. Hodgson says.

A National Post analysis of private-sector forecasts shows the Conference Board is not out of step with the consensus. Not one of 13 forecasters expects the provincial economy to grow more than 1.7% this year, and only one has annual growth reaching 3% by 2016.

All of which means, unless Ontario plans to raise taxes, it has no new money for public-sector compensation. This was the fundamental difference of opinion between the McGuinty government and the unions that gave rise to the Great Labour War. The Liberals said they simply couldn’t afford compensation increases; the unions disagreed.

The Drummond report supported the former position.

“Since the total bill for wages, salaries and benefits accounts for about half of all program spending,” the report said, “it is difficult to believe that program spending can be held to annual growth of 0.8 %” — recall that the government actually needs to keep growth even lower in the coming years — “if labour costs rise by much more than that.”

The teachers, again, provide a useful case study. The Drummond report noted that as of 2012 more than 76% of education ministry funding went to salaries and benefits for employees. Over the eight years that ended with the austerity budget of 2013, salaries had increased by 2-3% per year, even as the recession took hold in 2009. This coincided with a period of legislated smaller class sizes — meaning the hiring of thousands of additional teachers — and declining student enrolment. “The combination of increased funding and declining enrolment has led to a 56% increase in per-pupil funding” from 2003 to 2013, the Drummond report said.

It was these factors that allowed the McGuinty to hope that the unions would tolerate a wage freeze. The government explained that there was no other way.“When you look at how you’re going to get [to balance],” Mr. Hodgson says, “almost all of it is through compensation compression, taking on doctors and nurses and teachers.”

Some of those same teachers who, as of June, were just given a raise.

—-

The 2013 Ontario Budget is 314 pages long and contains dozens of tables and charts, but there is one line on one of those charts that illustrates just how daunting a task the government faces as it tries to wrestle the fiscal picture back to balance.

Program spending — all of the province’s expenses, excluding interest payments on the debt — is scheduled to be $117-billion in 2013-14. The following year, $118.3-billion. Then the totals from 2015-16 to 2017-18: $118.8-billion, $118.8-billion, $118.0-billion. That is a period of four years over which Ontario’s total program spending is expected to decline. Since the Liberals were elected in 2003, program spending has often grown by more than 6% from year to year. Even with the major austerity push of recent years, it has still grown at a rate of about 1% annually.

The best example of a government that succeeded in reducing program spending was the Chrétien Liberals of the mid-1990s, but those reductions did not come easy: 45,000 federal jobs were lost, some departments had their budgets cut by 20% and business subsidies took a 60% hit.

The Ontario Liberals, no doubt in part because they do not hold a majority, and already fighting to recover from scandals that include the politically motivated decision to scrap two Toronto-area power plants at a cost of at least $600-million, have so far avoided those kinds of deep reforms. They have clamped a lid on spending in the past two budgets, largely through wage freezes, while at the same time telling their public servants that they were only being asked to “take a pause” on compensation increases. Big-ticket recommendations from the Drummond Report — cancelling full-day kindergarten and rescinding the Ontario Clean Energy Benefit — were rejected, and if some of the more ambitious structural reforms are being implemented, such as retooling a business-subsidy program that costs $2-billion a year, the Liberals are being very quiet about it. (Last year’s budget included a new subsidy of $45-million to support local musicians.)

And with the health and education ministries already scheduled to have multi-billion-dollar budget increases over the next few years, it leaves the government with no margin for error when it comes to containing other costs. Credit-rating agencies are watching with interest. “They are setting out the envelope for spending, and they need to manage within that envelope,” says Jennifer A. Wong, Ontario analyst at Moody’s.

So, how’s that going?

—

Warren “Smokey” Thomas is the president of the Ontario Public Service Employees’ Union, which represents 55,000 workers in everything from vehicle registration offices to prisons.

Asked if he has detected a shift in tone from the government in the change from Dalton McGuinty to Kathleen Wynne, he answers cautiously in the affirmative. “I would say they’re not deliberately picking fights,” Mr. Thomas says. He says that some Cabinet members who refused to meet with him while Mr. McGuinty was in charge are much more available now that Ms. Wynne is leading the province. “I don’t know that there’s going to be the wars like there was with the teachers,” he says.

This past spring certainly saw the government retreat from the battlements. In addition to the concessions made in the new teacher contracts — fewer unpaid days off and more paid sick days, and in elementary teacher’s case the 2% raise that begins next year — the province also reached last-minute settlements with Lottery and Gaming and Liquor Control Board workers in separate deals that committed to “signing bonuses” this year and next and wage increases beginning in 2015.

Asked if the Finance Ministry remains committed to the austerity targets set out in earlier budgets, and specifically if it would seek another round of wage freezes, a spokeswoman for Mr. Sousa responded that “The Minister has been clear, there is no room for incremental increases in the budget. We’re asking everyone to do their part to control rising compensation costs and balance the budget by 2017-2018.” The government has also insisted that new spending at Crown agencies must be handled within their own budgets.

But, when the province and its various agencies begin the next round of bargaining with unions, it will have those deals as the most recent precedent. When the McGuinty government wrenched wage-freeze deals out of the teachers and doctors in late 2012, that set the stage for a series of zero-increase contracts across all levels of government. This could be crucial for settlements that reach arbitration: no longer can the government just point to a long line of zeroes.

Mr. Thomas says his union and others have certainly noticed the concessions. And while he maintains that he would most like to see the government deal with expense constraint by cutting out middle managers — “getting rid of some f—ing bosses,” as he put it — he also has a response ready for suggestions that the province can’t pay for wage increases.

“Any time they say there’s no money,” he says, “I say I got two words for you: power plants.”